Auditing Notes

Chapter 1
Introduction to Auditing
 Theory and Philosophy of Auditing
◦ What is an auditor?
◦ Why is there a need for auditors?
◦ Assurance and Non-Assurance Engagements
◦ Auditing postulates
 The Accounting Profession
◦ The nature of professional status
◦ Accounting Bodies in South Africa
◦ Pronouncements which regulate the profession
 Financial Statement and Audit Engagement
◦ Independent audit
◦ Roles of the parties and regulation
◦ Assertions
Theory and Philosophy of
Auditing
 What is an auditor?
◦ A person who gives assurance by comparing what is with what should be (a
standard) and expressing a conclusion
 Why is there a need for auditors?
◦ To add credibility to financial information
 Assurance and non-assurance
◦ Assurance is when information is independently evaluated and a
conclusion is given that gives assurance on the nature of the information
◦ Assurance is the expression of a conclusion, non-assurance is when the
work is performed, i.e. a compilation engagement or advice is given, i.e.
tax advice
 Public Interest Score
◦ A score that determine when companies must be audited
 What are auditing postulates?
◦ The basic foundation used for assurance engagements
What is an Auditor?
 Auditors are assurance providers
◦ There are different forms or types of auditing and
different levels of assurance
◦ Providing assurance is to add value by improving the
credibility of work performed by other people through
evaluating the work and giving a conclusion. The
auditor add assurance, trust or enhanced credibility to
the worked performed by others
 Examples of Auditors
◦ External auditors – legal restraints must be registered
with IRBA
◦ Internal auditors
◦ Government auditors
◦ Forensic auditors
Why is There a Need for Auditors?
 The agency theory: split between management and
ownership
◦ The owners are different from the managers and need
assurance on the trustworthiness of the managements reports
 Confidence in financial information
◦ The users of financial information need some assurance as to
the reliability and credibility of the information to help guide
future decisions
 Accountability
◦ At all levels in a business people who are responsible are held
accountable. The increased need for accountability lead to an
increased need for assurance services, i.e. internal audit,
government audit, forensic audit and environmental audit
Levels of Assurance
 Levels of assurance
◦ Assurance granted differs depending on the type of
engagement and range from limited assurance in a
review engagement to reasonable assurance in an
audit engagement
 Public Interest Score
◦ Audits are only required for companies when it is in
the public interest i.e. all public companies must be
audited
◦ The Public Interest Score identifies other companies
with a sufficient public interest requiring an audit
Public Interest Score
 Sum of:
◦ 1 point for each of the average
employees
◦ 1 point for every R1mil of
turnover
◦ 1 point for every R1 mil of 3rd
party liability
◦ 1 point for every individual who
directly or indirectly has a
beneficial interest in the
company’s shares
 <100 = review
engagement, limited
assurance
 100 to 349 = Audit if
AFS is internally
compiled, Review if AFS
is externally compiled
 350< = Audit,
reasonable assurance

Calculation Application
Assurance Engagement
 Assurance engagements
◦ “Express a conclusion designed to enhance the degree of
confidence of the intended user, other than the responsible party,
about the outcome of the evaluation or measurement of a subject
matter against the criteria”
◦ Criteria for an assurance engagement include:
 Three party relationship
 Criteria
 Evidence
 Conclusion or report
◦ Audit of financial statements is the most common assurance
engagement
◦ Other assurance engagements include a report on the
effectiveness of the internal control, limited assurance on
sustainability reports
Non-Assurance Engagement
 Engagements that does not meet the
definition of an assurance engagement
◦ No third party
◦ No suitable criteria to use for reliable measurement
◦ An opinion is not expressed
 Examples include
◦ Prepare financial statements
◦ Secretarial services
◦ Tax advice
Reasonable Assurance
 Why only reasonable assurance is given and not
absolute assurance
◦ Financial reporting by nature rely on estimates, i.e. for
year-end adjustments to depreciate non-current assets,
and to value current assets such as accounts receivable
and inventory
◦ The nature of audit procedures is also a limitation due to
inherent limitations of accounting and control systems,
the use of sampling and the persuasive nature of audit
evidence and the challenge of completeness of
information
◦ Challenges to ensure timely financial reporting, while
considering regulatory compliance and going concern
considerations
Auditing Postulates
 No conflict of interest between the auditor and management
(both have the same objective for fair presentation)
 Act exclusively as auditor to be able to offer an independent
opinion on the fair presentation of the financial information
 Professional status imposes commensurate professional
obligations
 Financial data is verifiable
 Internal control reduces the probability of errors and
irregularities
 Application of GAAP result in fair presentation
 That which held true in the past will hold true in the future
 Financial statements are free from collusive and other
unusual irregularities
The Accounting Profession
 Professional status
◦ Highly specialised skills and services
◦ Quality of the services cannot be easily evaluated by the
public
◦ Ethical and intellectual commitment that transcends the
desire for monetary gain
 Accounting bodies in South Africa
◦ SAICA – www.saica.co.za
◦ ACCA – www.accaglobal.com
◦ CIMA – www.cimaglobal.com
 Auditing bodies in South Africa
◦ IRBA – www.irba.co.za
Pronouncements
 Compliance with appropriate standards and ethical
requirements are critical
 Important pronouncements
◦ Auditing Professions Act, 2005
◦ Companies Act, 2008 and its regulations
◦ SAICA’s constitution, bylaws and Code of Professional Conduct
◦ IFAC’s Code of Ethics
◦ IRBA’s Code of Conduct and the Disciplinary rules
◦ International standards on
 Auditing (ISA)
 Review engagements (ISRE)
 Assurance engagements (ISAE)
 Related services (ISRS)
 International Auditing Practice Statements (IAPS)
 South African Auditing Practice Statements (SAAPS)
Financial Statement Audit
Engagement
Auditors
 External audit of

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financial statements

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 Conducted by a

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Registered Auditor

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o

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Issue Audit

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(RA) report

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orm
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Per AFS –
assertions

Directors Shareholders
Appoint

External audit or Audit Independent audit model

Roles of the Three Parties
 Shareholders
◦ Fund the business
◦ Appoint directors to manage the business
◦ Appoint auditors to provide assurance on the AFS
◦ Receive AFS
 Directors
◦ Responsible to manage the business
◦ Account for their stewardship in the AFS
◦ Prepare AFS in terms of a framework
 Auditor
◦ Gather evidence to render an independent opinion on whether the
financial statements issued by the Directors fairly present the
financial position and results of the operations of the company
according to the financial reporting framework
◦ Report the audit opinion to the shareholders
Role of the Companies Act
 Recognise the importance of assurance
 Audits compulsory for public companies
 Other companies can either:
◦ Independently reviewed
◦ Voluntary audit
 Some larger private companies could be required to be
audited
◦ Annual turnover
◦ Size of the workforce
◦ Nature and extent of its activities
◦ Depending on their Public Interest Score
 Regulate appointment of directors and auditors with
obligations and rights
Role of the Auditing Professions Act
2005
 Prohibits non RA from performing audits
 Designated auditor must be identified
 Can only express an unqualified opinion when:
◦ Audit is free from restrictions
◦ Complied with applicable auditing pronouncements
◦ Satisfied of the existence of all assets and liabilities shown in
the FS
◦ Proper accounting records have been kept in an official
language
◦ All necessary information was obtained
◦ No reportable irregularity was reported to IRBA
◦ Auditor complied with all laws relating to the entity under audit
◦ Auditor is satisfied as to the fairness of the financial statements
Role of the International Standards
on Auditing
 ISA provide standards which the auditor must
attain and provide guidance on how it should
be done
 ISA cover the entire audit process
Assertions
 Completeness – all events, elements and transactions
 Occurrence – took place at the entity
 Existence – elements exist at the date
 Cut off – recorded in the correct period
 Accuracy – amounts and other data is appropriately recorded
 Classification –recorded in the proper accounts
 Rights and Obligations – hold or control the rights to assets
and liabilities are its obligation
 Valuation and allocation – elements included at appropriate
amounts
 Presentation and disclosure – all events occurred and pertain
to the entity, financial information is appropriately presented
and clearly expressed, and financial information is fairly
disclosed at appropriate amounts
Summary
 Auditors are professional people who
strengthen the credibility of financial
information